Problem 9-24 Depreciation and Project Value (LO3) Ms. T. Potts, the treasurer of Ideal China, has a...

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Problem 9-24 Depreciation and Project Value (LO3)
Ms. T. Potts, thetreasurer of Ideal China, has a problem. The company has justordered a new kiln for $400,000. Of this sum, $50,000 is describedby the supplier as an installation cost. Ms. Potts does not knowwhether the Internal Revenue Service (IRS) will permit the companyto treat this cost as a tax-deductible current expense or as acapital investment. In the latter case, the company coulddepreciate the $50,000 using the five-year MACRS tax depreciationschedule. The tax rate is 35% and the opportunity cost of capitalis 5%.
a.What is the present value of the cost of the kiln if theinstallation cost is treated as a separate current expense?

b. What is the present value of the cost of thekiln if the installation cost is treated as a part of the capitalinvestment? (Round your answers to the nearest whole dollaramount.)

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3.7 Ratings (489 Votes)

a PV of tax shield if installation cost is treated separately 5000035105 16667 PV of tax shield on cost of kiln alone Year Depreciation Depreciation Tax shield on depreciation PVIF at 5 PV of See Answer

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Problem 9-24 Depreciation and Project Value (LO3)Ms. T. Potts, thetreasurer of Ideal China, has a problem. The company has justordered a new kiln for $400,000. Of this sum, $50,000 is describedby the supplier as an installation cost. Ms. Potts does not knowwhether the Internal Revenue Service (IRS) will permit the companyto treat this cost as a tax-deductible current expense or as acapital investment. In the latter case, the company coulddepreciate the $50,000 using the five-year MACRS tax depreciationschedule. The tax rate is 35% and the opportunity cost of capitalis 5%.a.What is the present value of the cost of the kiln if theinstallation cost is treated as a separate current expense?b. What is the present value of the cost of thekiln if the installation cost is treated as a part of the capitalinvestment? (Round your answers to the nearest whole dollaramount.)